Strategies for Competing in Global Markets
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In recent years, with the breaking up of economic barriers, globalization has taken prominence. Expansion of organization in to external markets enables it to take advantage of global skills, competencies for gaining suitable competitive advantage. This paper examines some international business strategies.
This paper examines the globalization of markets, features, and reasons for globalization of markets, advantages and disadvantages of globalization of markets. Strategies for competing in globalizing markets, issues companies face in crafting strategies suitable for multinational and globally competitive indirect environment. We also discuss howsmall firms are entering into the global market and growing alliance with foreign partners.
Globalization of markets refers to the process of integrating and merging of the distinct world markets into a single market. This process involves the identification of some common norm, value, taste, preference and convenience and slowly enables the cultural shift towards the use of a common product or service.
A number of consumer products have global acceptance. For example, Coca Cola, Pepsi, McDonalds, MTV, Sony Walkman, Levis Jeans, Indian masala dosa, Hyderabadibiriyani etc.
Features of Globalization of Markets
The size of the company need not be too large to create a global market. Even small firms can take advantage of this growing phenomenon.
The distinctions of national markets are still prevailing even after the globalization of markets. These distinctions require the companies to formulate different strategies for each market.
Most of the foreign markets are the markets for non-consumer goods like industrial products, machinery, equipment, raw materials, computers, software, financial products etc.
The global firms compete with each other frequently in different national markets including home markets. For example, Coca Cola is the global rival of Pepsi, Boeing and Airbus. Though these companies compete with each other they create a global market.
Reasons for Globalization
Large-scale industrialization enabled mass production. Consequently, the companies found that the size of the domestic market is very small to suffice the production output and thus opted for foreign markets.
Companies in order to reduce the risk diversity of portfolio of countries.
Companies globalize markets in order to increase their profits and achieve goals.
The adverse business environment in the home country pushed the companies to globalize their markets.
To cater to the demand for their products in the foreign markets.
The failure of the domestic companies in catering the needs of their customers pulled the foreign countries to market their products.
Advantages of Globalization of Markets
Free flow of capital and increase in the total capital employed.
Free flow of technology from developed countries to developing countries.
Spread production facilities throughout the globe.
Balanced development of world economies.
Increase in production and consumption of outputs.
Commodities available at lower price with high quality.
Cultural exchange and demand for a variety of products in foreign market.
Increased job opportunities and income.
Balanced welfare and prosperity of the country's economy.
Disadvantages of Globalization of Markets
Globalization kills domestic (small) businesses.
Exploitation of human resource in global firms.
Leads to unemployment and underemployment in developing countries.
The demand for domestic products decreases.
Imbalance in wealth distribution.
National sovereignty at stake.
May lead to potential colonialism of poor countries.
WHY COMPANIES EXPAND INTO FOREIGN MARKETS
Four main reasons why companies opt for expansion into foreign markets:
Gaining access to new clients.
Achieving lesser costs and hence enhance firm's competitiveness.
Capitalizing on its core competencies.
Spreading firm's business risk.
CROSS-COUNTRY DIFFERENCES IN CULTURE, DEMOGRAPHY AND MARKET CONDITIONS
Small firms are now vying for foreign markets where there is considerable variation in market conditions. It poses a much bigger challenge than when just competing at home.
Small firms enter into foreign market initially to know the responsiveness to cross-country difference in culture, demography and market conditions. It complicates the task of competing with other players. This is the difficult and challenging task for small firms entering into foreign markets. One objective is to balance pressures and be responsive to local situations of each country. Also there is varied pressure for lower costs and prices of the products and services offered.
The Potential for Locational Advantages Stemming from Country to Country
Company's potential for gaining competitive advantage also depends on the foreign city it decides to setup its production centre or any other infrastructure. This is a major area of concern. Rivals may have lower-cost locations and is a matter of considerable strategic concern.
Fluctuating Exchange Rate
The volatility of exchange rates greatly complicates the issue of geographic cost advantages currency exchange rates often to fluctuate as much as 20 to 40 percent annually, changes of this magnitude can totally wipe out a country's low-cost advantage or transform a former high-cost location into a competitive cost location.
Domestic Government Restrictions and Requirements
Domestic government enacts all kinds of measures affecting business conditions and the operation of foreign countries in their markets. Domestic government may set local content requirements of outputs made inside their borders by foreign-based companies, impose tariffs or quotas on imports, put conditions and restrictions on export to ensure adequate local suppliers, and regulate the prices of imported and locally-produced goods. In addition, outsiders may face a rules and regulations regarding technical standards and product certification. Some government, anxious to obtain new plants and jobs, offer foreign companies a helping hand in the forms of subsidies, privileged market access, and technical assistance.
MULTI-COUNTRY COMPETITION OR GLOBAL COMPETITION
Multi-country or multi-domestic competitions exist when competence in one national market is independent of a different national market. There is no such thing as 'international market', only a collection of country markets.
International competition exists when competitiveness across national markets are linked strongly to form a truly international market where leading competitors compete head-to-head in different countries.
In multi-country competition, rival firms compete for national leadership. In globally competitive industries, rival firms compete for worldwide supremacy.
For a company to be fruitful in new markets, its business plan must be different from one country to another. Business and competitive environment must be taken into account.
STRATEGIC CHOICES FOR COMPETING IN FOREIGN MARKETS
Strategic options for a company entering and competing in foreign market that decides to expand outside its domestic market and compete internationally or globally. Important strategic options for a company competing in international market are listed below:
A multi-country strategy vs. global strategy
Pursuing competitive advantage by competing in a multinational
Strategic alliances and joint ventures
Company is manufacturing products and service for exporting to foreign markets. It is an excellent Initial strategy for pursuing international sales. It minimizes both the risk and capital requirements. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with foreign wholesalers who are experienced in importing to handle the entire distribution and marketing of outputs and marketing function in their countries regions of the world. If it has more advantages to Company and has to domination to the control over these functions. In this case, a manufactures can establish its own distribution and sales organization in some or all of the target foreign markets. Either Way, a firm minimizes its direct investments in foreign countries because of its home-based production and export strategy.
Whether an export strategy can be pursued successfully over the long run depends on the relative Cost competitiveness of a home country production base. In some countries, firms gain additional sale economies and firm centralizing production on several giant plants whose output capability exceeds demand in any country market. An export strategy is open for firms when the manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants or when it has relatively high-shipping costs. Unless an exporter can keep its production and shipping costs competitive with rivals having low-costs plants in location close to end user markets, its success will be limited.
Licensing foreign companies to use the company's technology or giving permission to produce and distribute the company's products and service, Licensing mode carries low financial risk to the licensor. Licensing presents considerable economic uncertainty and is politically volatile. By licensing the technology or the production rights to foreign-based firm, the firm does not have to bear any risk. The licensee is freed from the risk of product failure and at the same time is able to generate income from royalties.
Advantages of Licensing Strategy
Licensing mode carries low financial risk to the licensor.
Licenser can investigate the foreign market without many efforts on his part.
Licenser gets all the benefits with minimal investment on R and D.
Licensee is free from the risk of product failure.
Disadvantages of Licensing Strategy
Licensing agreements reduce the market opportunities for both the licenser and licensee.
Both parties have responsibility of maintaining the product quality and also in promoting the product. Therefore, one party's actions can affect the other.
Costly and tedious litigation may crop up and hurt both the parties and the market.
There is scope for misunderstanding between the parties despite the effectiveness of the agreement.
There is a problem of leakage of the trade secrets of the licensor.
The licensee may develop his reputation.
The licensee could sell the product outside the agreed market territory and/or after the expiry of contract.
Franchising strategies is better suited to the firm that entered to global business and expanded its products and service to international market. Franchising is a form of licensing. The franchising can exercise more control over the franchised compared to licensing. In franchising, a separate organization called the franchisee operates the business with the name of another company called the franchiser. Under this agreement, the franchisee pays fees to the franchiser. The franchiser provides the following service to the franchisee:
Continuous support systems like advertisement, Human-Resource development, reservation services and quality assurance programmes.
The franchising agreement should contain important items as listed below:
Franchisee has to pay a fixed amount and royalty based on the sales to the franchiser. Franchisee should agree to adhere to follow the franchiser's requirements like appearance, financial reporting and operation procedures and customer services etc.
Franchiser helps the franchisee in establishing the manufacturing facilities, service facilities, provide expertise, advertising and corporate image etc.
Franchiser allows the franchisee some degree of flexibility in order to meet the local tastes and preference.
For example, in India NIIT have the franchised computer training centres in entire India.
Advantages of Franchising
Franchiser can enter global markets with low investment and low risks.
Franchiser can get free knowledge regarding markets, different cultural aspects of the new market and the environment in general of the host city or nation.
Franchiser learns more lessons from the experiences of the franchisees, which he could not experience from the home country's market.
Franchisee can early start a business with low risk as he selects an established and proven product and operating system.
Franchisee gets the benefits of Research & Development at a low cost.
Franchisee is free from the risk of product failure.
Disadvantages of Franchising
International franchising can become more complicated than domestic franchising.
It is difficult to have full control over an international franchisee.
Franchising agents reduce the market opportunities for both the franchiser and franchisee.
Both parties have equal responsibility of maintaining the quality of the product and also in promotion of the product.
There is scope for misunderstanding between the parties. There can be leakage of trade techniques and other secrets.
A Multi-country Strategy vs. A Global Strategy
A multi-country strategy is suitable for industries where multi-country competition has high dominance. Domestic responsiveness is very essential in such a scenario.A global strategy works best in markets; therefore it is globally competitive or beginning to globalize.
DIFFERENCE BETWEEN MULTI-COUNTRY AND GLOBAL STRATEGIES
Selected target countries and trading areas of business
Countries where the demand for goods and services is high.
Business strategies to fit the conditions of each domestic country situation; there is little or no strategy coordination across countries.
Business basic strategies are the same worldwide and it fluctuates from one country to another country: it is the basic requirement.
It adapted to local culture and the particular desire and expectations of local buyers.
Mostly standardized quality products and service sold worldwide.
Plants widespread across many home countries, each producing products and service are suitable for the surrounding local
Plants located on the basis of maximum competitive advantage for the products and service for the firm.
Source of supply of raw materials
Supplier in domestic country preferred (local sources required by home government)
Attractive supplier from anywhere in the world.
Marketing and distribution
It adapted to practices and culture of each home country
Much more worldwide coordination minor adoption to home country situations if required for the business
Cross-country strategy connections
It helps to transfer ideas, technologies. competencies. and capabilities that work successfully in one country whenever such a transfer appears advantages
It helps to use much the same technologies. competences and capabilities in all country markets, but new strategic initiatives and competitive capabilities that prove successful in one country are transferred to other country markets
From subsidiary companies to handle operations in each home country. each subsidiary operates more or less autonomously to fit home country
All major strategic decisions are closely coordinated at global headquarters: a global organizational structure is used to unify the operations in each country
Achieving Locational Advantage
Building and achieving location advantage, a company must consider two issues. They are as follows:
Whether to concentrate each activity it performs in a few selected Countries or disperse performance of the activity to many nations.
In which countries to locate particular activities. Companies tend to concentrate their business in a limited number of cities.
When the costs of manufacturing or other activities are significantly lower in particular geographic locations than in others.
When there are significant scale economies in performing the activities - the presence of significant economies of scale in components production or final assembly means that a company can gain major cost savings from operating a few super-efficient plants as opposed to a host of small plants scattered across the world.
Transferring Competencies and Capabilities across Borders
Domestic companies are entered to outside market that purpose they are successfully competing host Country markets and growing sales and profits in the process. Transferring competencies capabilities and resources strengths from country to country contributes to the development of broader or deeper Competencies and capabilities. It is ideally helping a company achieve dominating depth in a competitively valuable capability or resource or value chain. There are strong basis for sustainable competitive advantages over other multinational or global competitors and especially so over small domestic competitors in host countries. Domestic companies are usually not able to achieve dominating depth because a one country customer base is too small to support a resource build-up, therefore, their market is just emerging and sophisticated resources have not been required.
Coordinating Cross-Border Activities
Coordinating company activities located in different country. It contributes to sustainable competitive advantages to companies in several different ways. Companies can compete in multiple locations across the world, can select where and how to challenge competitors. Multinational or global competitor may decide rival, may decide to retaliate against an aggressive rival in the country market, where the rivals financial resources for competing in other country markets, capturing greater market share, subsidizing greater market share and subsidizing any short-term losses with profit earned in other country.
It refers to company earning huge profits from host country because of its strong market position. Multi-country or global companies may also enjoy huge profit position in other nations where they have a strong competitive position like big sales volume, capture market share and attractive profit margins.
Global company has the flexibility of low prices for products and service in domestic market and capture market share at the domestic company's expenses subsidizing razor-thin margins or losses with healthy profits earned in its sanctuaries, this practice called as cross market subsidization.
ALLIANCES WITH FOREIGN PARTNERS
Strategic alliances can help multinational firms in globally-competitive industries to strengthen their competitive positions while at the same time preserving their independence. Alliance refers to agreement between companies to do business in host country market and international market. Companies will make strategic alliance and cooperative agreement towards another company to enter foreign market. It increases strength of the strategic partner in the world markets. More recently, companies from different parts of the world have formed strategic alliances and partnership arrangements to strengthen their mental ability and partnership arrangements to serve whole continents and move toward more global market. Strategic alliances are very useful in helping establish new opportunity in world markets
A company realizes the potential strategic alliance with collaborative partnerships with foreign enterprises. It seems to be six factors as functions as listed below:
Picking a good partner in global market.
Being sensitive to cultural differences in local market.
Strategic alliance must be benefiting and sharing the information both parties.
Ensuring that both parties live tip to their commitments and gets benefits from the business.
To make decisions process very fast and actions can be taken immediately when technological changes in business.
Both parties can be managing the learning process and then adjusting the alliance agreement.
COMPETING IN EMERGING FOREIGN MARKETS
Companies fighting for global leadership today have to consider competing in emerging countries like Brazil, India and China. Firms that enter into global markets grab this opportunity for economic growth and increases standard of life of the employees of the global firm.
Emerging foreign markets earn huge profits quickly and easily. Therefore, newcomers have to be very responsive to local conditions. They will be willing to invest resources for the development of market for their products and services over long periods and be patient in earning a profit.
STRATEGIES FOR LOCAL COMPANIES IN EMERGING MARKETS
Local companies are seeking resources and opportunity. However, rich companies are looking to enter the markets of emerging countries. What are the options for local companies in upcoming markets and wishing to survive against the incoming global giants? An important strategy for local Companies in competing against global challenges are as listed below:
Defending against global competitors by using home field advantage
Transferring the company's expertise to cross border markets
Dodging global entrants by shifting to a newer business model
Contending on a global level
Hence, it may be concluded that most successful organizations must follow some type of strategy suiting to their needs to compete in this rapidly globalizing world. Thus, it is recommended that given in today's cut-throat competition, any and every organization aspiring to be successful should refrain from concentrating on a single market. Then the sustained success would soon be following them.
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